Recently, the BBC released two pieces of news that were, in my view, underreported.
At least, so far.
The first was that the Bank of England had raised central interest rates by 25 basis points to 0.5%, the first back-to-back increase since 2004. In January, rates had finally been increased from their historic low of 0.1% where they’d been since March 2020.
The second was that Ofgem, the British energy regulator, quietly announced that the energy cap would be lifted on April 1, resulting in a very substantial increase (54%) in energy bills for, well, pretty much everyone. True, there may be a few on very long-term contracts who escape, but even they can’t run forever.
On their own, either of these things is a significant issue in an economy that has been weakened by COVID-19 and undergone enormous change as a result of Brexit. However, there’s more.
In fact there’s much, much more.
April Fool?
The first of April is also significant because on that date, something else takes effect that we have known about for some time — the increase in National Insurance rate.
This is paid by all employees above a certain earnings limit and all self-employed workers as a means to pay for social services, but, in particular, the National Health Service (NHS).
The charge was originally introduced in 1911, under the appropriately named National Insurance Act as a general insurance against unemployment and illness. However, when the NHS was launched in 1948 under the Labour government of the time, it was forever linked with that service.
In reality, of course, it is now a general tax that is used for anything and everything, but the perception of the two things being linked still remains and appears entirely unbreakable by the general population.
The British NHS is cited as one of the best in the world, ranking number 10 globally in the latest world population review report. By comparison, the U.S. is ranked at number 30, sandwiched between Mexico (29) and Lithuania (31). The U.K. system has another advantage — it is entirely free for any citizen to use it whenever they like, as much as they like, throughout their entire lives.
But this is not cheap and, since health care is currently extremely topical, it has been relatively easy for the current Conservative government to press ahead with a monster 12.5% minimum increase in National Insurance payments on that date.
The Bank of England has also made it clear that there will be additional interest rate rises, and that they forecast inflation to pass 7% around that time as well. For the record, I think this number is extremely conservative and real rates will be much higher.
Let’s not forget that inflation has a much bigger impact that most people think.
Aside from the fact that governments tend to measure inflation in a way that is most advantageous to them by tinkering with the “basket of goods” and it is almost certainly understated anyway, the fact is that inflation is subjective and personal.
If you’re buying a second hand car, for example, expect to pay around 14% more than you did last year, according to official consumer price index data presented by NationalWorld.
Hotel accommodation is up over 15%, and furniture and other homewares are up around 11% according to the same numbers. That’s far more than the current 5.4%.
As usual, the poorest are the hardest hit. A fascinating analysis of foods bought by lower income families, such as pasta and rice, by Jack Monroe in this article found that pasta had increased by 141% and budget rice had increased by an eye watering 344%.
Inflation really is subjective, but however it applies in our own case, it is a hidden tax that we have always accepted as part of using fiat currencies. Ultimately, whether you’re using pounds, U.S. dollars, euros or anything else, they all trend to zero over time.
And let’s face it, until recently, none of us had a choice on which currency to use.
How did we get here?
The short and convenient answer is “COVID-19” but, as usual with complex global macroeconomic relationships, the reality is not that straightforward.
There’s no question COVID-19 has a lot to answer for. Actually, as some of the people who have commented on this article have correctly pointed out, it might be more accurate to say that it’s the actions of governments as a result of COVID-19 that have a lot of answer for.
It has changed the way we work, leading to a huge period of readjustment. It has changed the mix of goods that we now demand, often from market sectors that simply weren’t ready for that change.
It has wreaked havoc with supply lines and work practices, causing shortages and surpluses in all the wrong places. It will take some time to see any sort of normality.
Then, there is energy. For a planet that has more of it than we could ever hope to use, we do a great job of arguing over it and wasting it. Geographic tensions in Eastern Europe in particular have exacerbated an already messy situation, driving prices upwards at unprecedented levels, creating all sorts of transportations issues as well as power management problems.
Energy prices affect literally everything, from filling up your car to the cost of getting your bread to the superstore. It is a powerful factor.
Finally, there is also the elephant in the room — quantitative easing. This economic stimulus technique of creating enormous amounts of new money our of thin air has been employed globally by almost all governments to the extent that the numbers have become farcical.
Earlier this week, for example, the U.S. reached $30 trillion dollars’ worth of debt, a number so large there is no hope of ever paying it down. Other countries may have different numbers, but they all have the same thing in common — that is the debt-to-GDP ratio is off the scale. This includes the U.K., which currently has a debt-to-GDP ratio of 108.5% according to this beautifully presented report from Visual Capitalist.
The bottom line is that you can’t print that much money and not expect it to have an effect. Just ask anyone from Turkey, Venezuela, Sudan or any of the other countries experiencing hyperinflation at the moment. (Hyperinflation is generally defined as being a rate more than 50%.)
There may well be other aspects to this, and it’s entirely possible we won't even know what some of them really are until we are able to look back and analyze what's left retrospectively.
But the point is a number of factors have come together to form a very nasty “perfect storm” for many citizens of many countries.
But in the U.K., finding a safe harbor from that storm may be next to impossible, unless you have a particularly robust lifeboat in the form of access to a truly hard money, such as Bitcoin, of course.
This is going to hurt
Right now, we’re strapped in for the ride, and some of us are positioned where can see trouble ahead.
We will survive, but we already know this is going to hurt. Most have no idea how much. Some might even be thinking that they can get away with it.
The odds of that, however, are not good.
If you earn money through pay as you earn or self employment, you will be affected.
If you have a mortgage, you will be affected.
If use power of any sort, you will be affected.
If you have any borrowings, you will be affected.
And so on.
Yes, there may be a time lag in some cases, but the fact is that you will feel the consequences of the changes coming, and there’s very little you can do except try and protect your own position. And if you’re banking on your government helping you, you’re out of luck.
Forewarned is forearmed, so what exactly is the “average” family really up against?
The scary numbers
Of course, a true “average” family doesn’t exist, but for the purposes of this example we’re going to create one.
This family has the national average wage of £30,000 a year, meaning they will probably take home around £26,500 after deducting taxes but adding back in social credits. That’s a little over £2,200 a month.
In truth, this number varies quite widely according to which source and methodology you use and it is always calculated at least a year in arrears, but for our purposes, it is not unrealistic.
They have a £200,000 repayment mortgage on their average house and are classed as an average family in terms of energy usage.
How will their finances change from April?
It’s likely their mortgage rate will be higher than it is now, so let’s assume the base rate increases by another (very conservative) 0.15% by then.
Their mortgage payment would increase by around £39 a month, or £468 a year, on that basis.
However, their energy bill would also increase by £57.75 a month, or £693 a year, which is the average consumption forecast for typical use on a standard tariff.
Then, on a fixed income of £30,000, their National Insurance contributions would increase from £2,451.84 to £2,665.90, meaning they would need to find an additional £214.06, or £17.84 a month, to cover the bills.
In total, these three items come to £114.59 a month, or £1,375.08 a year — even on this extremely conservative example. And this is all before general cost of living increases of food, petrol and any other variable rate borrowing they may have is taken into account.
In percentage terms, that’s over 5% of their total income taken in unavoidable costs and in short order. This is a very significant amount. And these numbers get much bigger much more quickly if you’re higher up the income scale or have a bigger house.
What is also true is that surviving in the U.K. on the median income of £30,000 a year is actually no mean feat as it is. In addition, unless your family received a pay rise of 5.4% this year (the current “general” inflation rate) they’re already starting on a back foot.
It’s a squeeze from all directions, and inflation and interest rates will almost certainly increase from here, making the situation even worse.
But, at the same time, the logic on a macro level works and makes sense from the Bank of England’s point of view.
The 5% our family will lose has to come from their disposable income, so they will cut back on certain things to make their books balance, reducing demand for certain goods and services across the entire supply chain.
Lower demand means supply can catch up and prices soften. Eventually, so economic theory goes, prices stop rising and the inflation beast is slayed.
The question remains, of course, as to whether this will really happen this time considering so many other factors are in play and the combined impact is so significant and so sudden.
Worse, since most people don't follow economic and financial news to any real degree, they will be almost certainly be blindsided. It’s possible there will be unrest and anger when the initial impact hits.
So, even if the bank does achieve its mandated target of a 2% inflation rate, at what cost will it come?
Your options
For most, there’s very few. They may try and get new jobs, promotions or take on extra work, but the reality is that it’s a losing battle. They’re transacting in something that is losing value faster than they can build it. Worse, most of them will not understand this until it is far too late.
It’s easy for me, as someone who has been studying, using and mining Bitcoin for many years, to say that “Bitcoin fixes this”, but the simple reality is that it does. Whilst I always encourage people to really take the time to understand what it is and why it is so important to our future financial health before doing anything, let me put it this way:
Without Bitcoin, I’d now be extremely concerned with the current developments and frantically trying to secure as many random assets as I could to offset the impending losses. Y’know, the same as we have had to do for countless economic iterations before.
But since I have acquired both Bitcoin itself and the proper understanding of it, I have to say I’m as relaxed about the whole thing as it’s possible to be - even though I’d still rather none of it was happening. This time, I feel like an observer, rather than a participant.
So, make of that what you will.
Want free access to articles, analysis, podcasts and training webinars? Why not subscribe to the ‘Bitcoin and Global Finance’ newsletter? Subscribers over 18, resident in Europe (see list on subscription page) & new to Bitcoin can claim £10’s worth of Bitcoin on joining! Unsubscribe at any time.
Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics and consultant to Luno.
Disclaimer: This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
If you found this content engaging, and have an interest in commissioning content of your own, check out Quantum Economics’ Analysis on Demand service.